Payday lenders hit pay dirt, analysis shows

Nine of 10 biggest payday lenders in UK doubled turnover in past three years, as cash-strapped households sought new ways to borrow

Pound notes. Although short-term loans can sometimes be cheaper than loans from conventional lenders, annual interest rates are often in excess of 5,000% APR. Photograph: Sarah Lee for the Guardian
Sarah Lee/Guardian

Nine of the 10 biggest payday lenders in the UK have seen their turnover double in the last three years, while one has recorded a 32-fold increase in profits since the start of the recession.

The payday lending industry has boomed in recent years as cash-strapped households have sought alternative ways to borrow following the withdrawal of mainstream banks from lending and the removal of government assistance such as the crisis fund. Although short-term loans can sometimes be cheaper than those from conventional lenders, annual interest rates are often in excess of 5,000% APR and costs can quickly spiral if a debt is extended or a payment missed.

The BIJ looked at data in company accounts which sometimes included revenue and profits from other activities such as cheque cashing and pawnbroking. Where a company has a US parent, for example The Money Shop which is part of Dollar Financial, only the UK operations were included. It said there had been a rush of firms into the short-term, high-cost credit industry, with at least 24 new ventures launched since 2008. But, it said, "far from feeling squeezed by the increased competition, all but one of the 10 largest lenders specifically offering payday loans saw their turnover more than double in just three years".

It found that while at the start of the recession in 2008 just five of these companies were large enough to publish full accounts and only had a turnover of more than £50m, now four companies have turnovers substantially over £100m.

One firm, Lending Stream, which offers loans of up to £1,500 for up to six months at an interest rate of 4,071.5% APR, has increased its turnover by 42 times in three years, while Wage Day Advance, which quotes an APR of 7,069.3%, has increased its profits 32-fold to £20m since 2008.

But Lending Stream was the only one of the 10 which did not record a profit in its latest accounts, for 2011, having paid £5.2m in royalties and other expenses to a related US company. The entire sector is under the scrutiny of the Competition Commission, which is examining how easy it is for customers to shop around and compare costs and whether it is easy for new firms to enter the market. In April 2014 the firms will come under the Financial Conduct Authority, and a consultation on the rulebook for lenders is expected this month.

Paul Blomfield, Labour MP for Sheffield Central, who is calling for more regulation of the sector in a private member's bill currently before parliament, said: "Payday lenders are taking advantage of the UK's uniquely unregulated market to grow their business by picking the pockets of the poorest … if ministers let the status quo continue, payday lenders will continue to grow by exploiting increasing numbers of cash-strapped people."

• This article was amended on 9 September 2013. It previously said incorrectly that Quick Quid is part of Dollar Financial.